Equity put–credit default swap arbitrage opportunities disappearing, say US dealers

Jeremy Howard, head of US convertibles research at Deutsche Bank in New York, has said that the days of buying low-strike equity put options to hedge sales of credit default swap protection are largely gone.

Speaking on condition of anonymity, other top US credit default swap dealers agreed that the arbitrage first recognised early this year had largely dried up.

One dealer said an alternative, somewhat equivalent position was now to short a company’s stock and sell credit protection.

Though practised for years, Deutsche's Howard said capital structure arbitrage is in a sense coming of age.

To foster development in the fledgling discipline, in April credit default swap dealing heavyweights Deutsche